Germany can increase spending without breaking debt rules, study says

BERLIN (Reuters) - Germany can increase public investment to boost growth without breaching domestic legislation that limits the government’s access to new debt or busting European Union debt rules, a study published on Monday said.

It argued that spending boosts economic growth, which in turn allows for lower debt to GDP ratios and for more nominal borrowing while keeping ratios the same.

The findings will galvanize demands by the Social Democrats, junior coalition partners of Chancellor Angela Merkel’s conservatives, to increase spending on infrastructure, education and digitalization fewer than 8 months before the election.

“Thin public investments are holding back Germany’s economic potential and the prosperity of future generations is being compromised,” said Aart De Geus of the Bertelsmann Foundation, which co-authored the study with Prognos AG.

The study found that Germany’s public investment has been averaging 2.2 percent of output. If the trend were to continue, such investments would combine with other factors to produce average yearly growth of 1.4 percent until 2025.

But by raising public investment to 3.3 percent of output - the average among OECD members - Germany would gain extra 0.2 percentage points for an average yearly growth of 1.6 percent in the next 9 years.

Such investment levels would add 80 billion euros more to state coffers until 2025. In addition, such investments would raise the value of the public capital stock by 420 billion euros as opposed to stagnant investments, the study found.

The government, which wants to keep a balanced budget until 2020, has rejected criticism of its fiscal policies, saying it had already upped spending to accommodate a record influx of refugees and made funds available for infrastructure projects.

“A sustainable budget policy should not be only focused on debt,” De Geus said. “Growth and wealth must be promoted more substantially.”

The study found that raising investments would help Germany reduce its debt burden, which stands at some 70 percent of gross domestic product, to well below 50 percent.

The government wants to reduce its debt to less than 60 percent of gross domestic product in 2020 for the first time since 2002, meeting a criterion set out in the EU’s Stability and Growth Pact.

Finance Minister Wolfgang Schaeuble has ruled out taking on new debt to finance more state spending. But if the government did decide to loosen its purse strings, its fiscal wiggle room would be limited by a strict legal framework enshrined in the German constitution.

The so-called debt brake allows the federal government to take on new debt equivalent to 0.35 percent of gross domestic product each year.